Nike Marches On
Athletic footwear and apparel giant Nike (NYS: NKE) posted better-than-expected first-quarter results. Revenues and earnings both recorded double-digit growth. With future orders growing as well, let's analyze this quarter and see what's in store for investors.
For retailers, it's all about how you get people to spend money in your store, and Nike seems to know how to do it. The retailer posted an 18% increase in revenue despite economic uncertainty and sluggish growth in consumer spending. The company also reported that future orders increased 16%, up 13% on a currency-neutral basis.
Nike is a worldwide player known for its innovative and differentiated products. Shoppers in well-performing economies, especially emerging markets, made sure that the company's top line did not suffer. Argentina, Mexico, and Korea contributed significantly to this trend. Their growth helped push first-quarter emerging-markets revenue up 24% on a currency-neutral basis.
Nike's direct-to-consumer approach is also paying off with a 20% increase year over year. The e-commerce business experienced growth of more than 30% in the first quarter this year.
Points of concern
Higher materials and freight costs are eating into the company's margins. Gross margin shrank to 44.3% from 47%. Given inflationary conditions, cost pressures are expected to persist and keep affecting the gross margin going forward. I project general, selling, and administrative expenses will go up in the second quarter and into 2012 as Nike invests in demand creation before the holiday season, European Football Championships, and the London Olympics.
Inventories experienced a 41% increase. However, I don't think this is an alarming situation. Companies typically build inventory when sales increases. Moreover, the company's trailing-12-month cash conversion cycle is at 86 -- much lower than peers Deckers Outdoor (NAS: DECK) , Coach (NYS: COH) , and Crocs (NAS: CROX) . Hence, even if inventory has increased, a low CCC compared to its peers indicates Nike still has a strong operational position.
I believe a well-established brand like Nike, with expansion plans directed to the emerging markets, should experience growth despite a slow economy. Nike, which enjoys the market leader position, can leverage its strength by raising prices for certain products. The main point of concern is rising product costs. I think the stock is definitely worth watching.
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At the time this article was published Abantika Chatterjee doesn't own any shares of the companies mentioned above.The Motley Fool owns shares of Coach. Motley Fool newsletter services have recommended buying shares of Coach, Deckers Outdoor, and Nike. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.